Most of us get the general idea of diminishing returns and diminishing marginal utility — even if we don’t know the technical terms. The old saying “too much of a good thing” captures the essence of these economic concepts.
For instance, one hour of exercise might do your body good. But few would argue that 10 straight hours with no break will prove 10 times as beneficial. Most see that the fifth glass of red wine at one meal fails to offer the same health benefits as the first. One spare roll of toilet paper under the sink is valuable. The 20th roll? Taking up space that could be used for other bathroom supplies? Not as valuable.
While the notions of diminishing utility and diminishing returns make sense in our personal lives, some of us tend to forget them in the context of public policy debates. Perhaps a recent report involving higher education in one Asian country can help us remember.
Preston Cooper highlights the report in an article titled “Why South Korea can’t quit college” for the James G. Martin Center for Academic Renewal. That nation “has a more educated population than any other country in the developed world,” Cooper reports. Specifically, 70% of South Koreans between 25 and 34 have completed some higher education. In the United States, the comparable number stands at 49%. The “rich-world average” is 44%.
Higher education is good. It produces benefits. Politicians and policymakers of all stripes spend much of their time talking about its positive economic impact.
If current education levels are good, more must be better. Right? Here’s where it helps to recall what we might label the “diminishing laws.”
If every single additional unit of higher education produced the same level of economic benefit, we would expect South Korea to shine above other “rich-world” nations in economic factors attributable to education.
That’s not what Cooper finds. “In every advanced nation, university graduates out-earn those with only a high school degree,” he writes. “But when the number of workers with a university degree rises, the number of university-level jobs often doesn’t keep pace. Korea’s glut of educated workers means that those with higher degrees earn just 24% more than high school graduates, compared to a 69% earnings boost in the United States. And in a stunning reversal of a near-universal norm, young Koreans with a university degree have a higher unemployment rate than their less-educated peers.”
Negative unintended consequences follow policies boosting the number of South Korean students pursuing higher education. “With places at top-tier universities limited and the labor market suffering from an oversupply of university-educated workers, spending more and studying more will not move the economy forward,” Cooper concludes. “As one Korea Herald writer opines: ‘Academic inflation has effectively devalued actual experience on the job and undermined diplomas earned from all but the most prestigious institutes.’”
South Korea’s experience ought to raise some questions for American policymakers. Boosting the number of American students attending college is likely to lead to an overall increase in educational attainment. But that doesn’t mean each additional college student will benefit to as great an extent as students who would attend college without new government enticement.
In other words, if a college education generates a “69% earnings boost” for a student today, there’s no guarantee that a student in a future America with more college education would see similar results. Extra earnings are likely to taper off as the percentage of people with higher education grows.
That’s not the basis for an argument against higher education spending. But the “diminishing laws” tell us that we should not expect the next dollar of new spending to produce the same beneficial results as the first dollar. At some point, the next dollar spent educating a college student is bound to produce fewer benefits than the same dollar would generate when spent in other ways.
This lesson extends to other areas of public policy. The next dollar of spending on a K-12 student is not worth as much as the first or even the 5,000th previous dollar. The same goes for the next incremental level of spending on health care, roads, or environmental quality.
Those who draft state budgets need to keep those diminishing effects in mind. Doubling spending on a particular budget item is rarely likely to generate twice as much positive impact.
Failing to recognize that fact can lead to ineffective or wasteful taxpayer spending. As much as we know that we can have “too much of a good thing,” none of us wants to “throw good money after bad.”
Mitch Kokai is senior political analyst for the John Locke Foundation.